Everyone seems to be worries that prices will never fall to affordable levels, despite the fact we are witnessing unprecedented price declines everywhere. Those of you desirous of a high-end Irvine property have not seen the price drops you would like to see, so you conclude they will never get there. If you widen your view a bit, you see properties declining in value all around us and even within Irvine at the low end.
If you are watching the high-end market, these will be the last to fall because this is where knife catchers are most active. The high-end watchers of the IHB are a microcosm of the market. Even among this group, there are people willing to jump in at different price points. Each person capable of buying has a different degree of kool aid intoxication. Each potential buyer has a different tolerance for fear of being priced out—which is still the primary motivator of knife catchers. If you only make lowball offers, you may never get filled, and you will never own. This reality gets amplified into the fear of being priced out, and through this fear, people raise their bids.
Pause for a moment… Reflect on the emotions you felt when you read, “If you only make lowball offers, you may never get filled, and you will never own.” Did you feel the fear? How strong is it? Will you act on this fear? If you are introspective enough to have these emotional awarenesses, you can gauge your own level of kool aid intoxication. We are all different, and the most fearful are the most likely to become knife catchers.
Personally, I rely on my analytical skills to keep my emotional responses under control. I have faith that market pricing will fall to levels consistent with rental parity. It is a faith backed up by market data pertaining to previous market bubbles. I also recognize that even if prices do not reach rental parity, and if I never own, I will be better off financially by renting. It is a win-win. Intellectually, I recognize this truth. Emotionally, I have to let go and trust my intellect. It isn’t always easy.
For those who have been waiting for prices to reach rental parity, there are still signs the market is heading that direction. Before we get “there,” we need to identify what “there” is. In a stable real estate market, rental parity is a general guide, but not all market segments stabilize at rental parity. The low end, composed of undesirable condos and other properties where owner-occupants are rare often trade at prices below rental parity. The less desirable it is, the closer it trades to investor cashflow levels (GRMs from 100-120). The median type property that owner occupants desire trade near rental parity. This is particularly true for “starter homes,” those nicer condos and small 3/2s. The above median properties often stabilize just above rental parity (+10%.) This happens for a number of reasons: 1. The longer ownership period of these homes justifies a higher investment premium. 2. The limited supply makes them scarce. 3. Rents are more variable at the high end as most people who can afford the higher rents generally own instead.
In the market bubble of the late 80s, the low end of the market got bid up to rental parity, and the high end was pushed well above. When prices crashed in the early 90s, the high end crashed first, then the low end got hammered. With the low end already at rental parity and within levels of affordability, it made sense for the high end to crash first. Once the more desirable properties were at rental parity, there was an exodus from the low end that caused prices there to plummet. I mention this because I believe this is how the next stages of the drop will play out.
Since the Great Housing Bubble saw an unprecedented degree of price inflation, both the low end and the high end prices became elevated far above rental parity. As the low end comes down to rental parity, it is starting to find some support. At this point, we are looking much like the market in 1991—the low end is nearing rental parity, and the high end is still grossly overpriced. If history repeats itself, the low end may stabilize temporarily near rental parity while the high end declines. Once the high end drops to rental parity, the low end will take another drop down to investor cashflow levels. Is it going to happen that way? Who knows, but that is my best guess.
Today’s featured property is a 3/2 that appears to be at rental parity here in Irvine.
There is a new, non-commercial site I want to recommend everyone go check out: Loanzen.com. From the website, “Welcome to Loanzen — the community-driven mortgage information site (100% anonymous and free.) I recently applied for a loan and the broker attempted to tack on all sorts of absurd fees. I had no idea what was fair. So, I created Loanzen: A place where you can share the actual rates and fees you’re getting from lenders. By sharing your deal, you help the community and also get valuable comments back on your individual deal.”
It is exactly what it says. People anonymously submit the terms of loans they have been offered, and other people comment on whether or not it is a good deal. I think it is a fantastic way for people to help each other out. In particular, it should help people from being screwed by unscrupulous brokers pushing them into a bad loan just to make a few extra bucks. The commenters often know where the best deals can be found, and they can point the borrower to a better deal somewhere else. I think this site is a great idea, and I hope it catches on.
Have you noticed there are a large number of homes for sale in Shady Canyon? Why is that?
Of all the new neighborhoods in Irvine, I thought this one would have the least selling pressure, not because it isn’t ridiculously overpriced, but because typically in the over $2,000,000 price range, the buyers really are rich and have the reserves to weather a storm.
In a normal real estate market, new neighborhoods see almost no resale activity for at least 3 years because people buy new in anticipation of living there for many years. There are always people that need to move for unexpected reasons, but for the most part, resale activity should be very low in new neighborhoods. The fact that all of Irvine’s relatively new neighborhoods are showing high turnover speaks to a couple truths:
The owners are all overextended and cannot truly afford their properties.
Many bought with the intention of flipping and never intended to live there long term.
I suppose no amount of buyer/flipper/speculator stupidity during the bubble should really surprise me, but flipping multi-million dollar mansions? That is stupid. First, wouldn’t a very rich individual want to design and decorate their own place? Why would they pay a flipper a premium for something they will probably redo? Second, how many people capable of buying these homes are out there? Even in the gross stupidity of easy credit, there were not many people getting $10,000,000 loans to buy houses, and the number of people with that kind of cash is very limited. Third, how much carry cost does the flipper endure on a property like this? Can you imagine making the debt service payments on a $10,000,000 loan waiting to sell the property?
Anyway, for whatever reason, many properties are for sale in Shady Canyon, and in all likelihood, prices are going to drop there significantly. It is just a matter of time.
Located within the prestigious guard gated community of Shady Canyon,
this spectacular sprawling five bedroom custom estate captures the
serene rolling hillside views of Shady Canyon. The 13,500 sq. ft.
residence features exquisite high-end finishes and reclaimed products
throughout. From the motor court entrance with reclaimed French pavers
to the subterranean wine cellar connecting the residence to the pool
house and home theater, no expense has been spared in this truly
breathtaking estate. The gourmet kitchen provides an ideal central
location for family to gather and offers Carrara marble counters, a
walk-in refrigerator, gourmet appliances, a service kitchen & large
center island with a pop-up television. A beautiful pool, pool house
and home theater provide hours of entertainment and includes an outdoor
kitchen, with barbecue, pizza oven, dishwasher & built-in heaters.
The surrounding vineyard provides two barrels of wine at harvest.
In
New Book, The Great Housing Bubble, Lawrence Roberts Offers Buyers Advice On
Real Estate Negotiation During A Price Decline.
According to
Lawrence Roberts, the Housing Bubble Cassandra, the dynamics of real estate
negotiation has completely changed over the last two years. In his book, The
Great Housing Bubble, he provides specific recommendations to buyers for taking
advantage of their new power.
Irvine, Calif., Dec.
12, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
observes that “In a buyer’s market, the buyer has the power in a negotiation.
Buyers should take advantage of this power and negotiate the lowest possible
price. Since the price determines the loan amount and often the taxes on the
property, the buyer benefits through lower interest costs and lower taxes by
minimizing the purchase price.”
Roberts advises
buyers to make their first offer their best offer. He says, “This is the most
counter-intuitive part of buying in a buyer’s market. Ordinarily sellers, or
more accurately the seller’s realtor, try to create a sense of urgency to buy
the house.” He goes on to outline the procedure for buyers to pay the lowest
possible price for real estate.
When asked about
his motivation for writing “The
Great Housing Bubble,”
Roberts responded, “Sellers have the marketing machine of the National
Association of Realtorsto help them. Buyers have few sources of
unbiased information to assist their decision. Part of the purpose of this
writing is to educate both buyers and sellers on the realities of the
residential real estate market.”
Roberts has not
been popular with the National Association of Realtorssince he suggested that realtors should be
subject to oversight by the Securities and Exchange Commission regarding the
false statements they routinely make concerning the investment potential of
residential real estate.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
But the hills that we climbed were just seasons out of time.
House prices in our local real estate market, like prices in many others, climbed a mountain of debt to heights they should have never seen. There will be a time when those prices are justified—perhaps 20 years from now—but seeing those prices in 2006 was a season out of time.
Friends, Irvinites, countrymen, lend me your ears; I come to decry the housing bubble, not to inflate it. The evil that men do lingers on through a devastated economy; the good is oft interred with their foreclosure. So let it be with the housing bubble. The noble Irvine Renter hath told you that homedebtors were greedy. If it is so, it is a grievous fault, and grievously have homedebtors answered for it.
To everything there is a season. A time to gain, a time to lose. A time to time to laugh, a time to weep. A time to build up, a time to break down. A time to dance, a time to mourn.
The Great Housing Bubble is over. It is time to move on. The Ponzi Scheme has collapsed. The lifestyle of mortgage equity withdrawal has come and gone. The dream of endless appreciation is a fantasy gone awry. Winter is upon us.
We had joy, we had fun, we had seasons in the sun. But the wine and the song, like the seasons, all have gone.
So where do we go from here? It is pretty frightening when you consider all the analogies of our current situation are to the Great Depression. It is clear that what is to come is going to be very bad, and we have not seen the worst of this yet. Our elected officials and the bureaucrats at the Federal Reserve are doing all they can to straighten out this mess. Hopefully, their meddling in the financial markets will not do more harm than good. I have my doubts. What happens is largely out of our hands. Even the people who are supposed to be in control are not. They more they try to reassure us, the more anxious I become. If events were under control, no assurance would be necessary.
It is natural to become reflective in a time like this. It is a good opportunity to reassess what is important and what is not. Most people are being forced to sacrifice possessions and pretenses of wealth. For some people, their attachments to these objects and illusions will cause them a great deal of suffering. For others, being released from these attachments will be a spiritual blessing. Difficult economic conditions create circumstances of loss and mourning. How we deal with these circumstances speaks to our character, and if we learn its lessons, it will reveal the path to true happiness, contentment and feelings of abundance.
Today’s featured property is a new condo sporting a significant discount. We have profiled another property in this neighborhood. Whoever owns it now cannot be happy with this new comp.
How can I respect your crime When all you criminals whine They bought and sold you, run on, run on
The conforming loan limit through the GSE’s is currently limited to $625,000 in our area. This is down from the $729,750 temporarily allowed under the Economic Stimulus Act of 2008. Any loan larger than this amount is considered a jumbo, and jumbo loans carry a higher interest rate. The current spread on a 5/1 ARM (a method of financing I do not recommend) is only 9 basis points; however, the spread on 30-year fixed rate loans is 130 basis points. Also, jumbo loans generally have higher downpayment requirements than conforming loans. All this means that the jumbo loan market is thinner because fewer buyers have the cash for the downpayment or the income to qualify.
Since our real estate market is collapsing from the bottom up, the slice of the market starting to show stress now is the bottom of the jumbo market—$685,000 to $900,000. Homes priced to sell in this range are having a hard time finding buyers, and prices are starting to drop. Today’s featured property is a short sale priced at $775,000. It recently dropped its price $80,000 in an effort to chase the market.
My home is kind, man it pays to be blind
I want to share with you a couple of recent experiences I had that demonstrate to me the power of conformity and denial.
I have been arranging to speak at various groups active in my industry. There are a great many even in my industry that do not fully understand what is happening and why. One of these groups told me they would like to have me as a speaker, but only if I am planning to give a Pollyanna message of hope. Well, there is always hope, but the reality is not particularly positive, so I will not be speaking there any time soon. The reason is simple. They are in denial, and they want to maintain that even at the expense of seeing reality. I can not and do not live my life this way, so it is difficult for me to relate to this mentality, but I do understand their desire for denial and the reason for their enforced conformity.
I subscribe to a reporter lead service to try to generate free publicity. Yesterday, I had a phone interview with a reporter doing a story on people who cannot sell who are renting out their houses. I explained to her that those homeowners with a positive cashflow do not have a problem, but many bubble buyers cannot cover their cost of ownership with rents, and they do not have any good options. They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years). Many, if not most, of the people who try to rent it out will end up in foreclosure anyway. This reporter got upset with me because my message was not positive, and she had to spin this story in a positive light. I didn’t know what to say. All I can do it report reality. What she needed was someone from the NAR to tell her that prices will be back at the peak in two years and those who rent out their losing venture will be made whole soon. I couldn’t say that because it is not reality. Even the media is under pressure to conform to the culture of denial.
I have often wondered why our government sets up its method of reporting recessions so that it isn’t announced until it is almost over. Now that I see the powerful need for denial among the populace, I think I understand.
It’s time we stop, hey, what’s that sound Everybody look what’s going down
House prices: house prices are going down. That sound is the weeping and gnashing of teeth of speculators and homedebtors everywhere.
A thousand people in the street Singing songs and carrying signs
“Bail me out” printed on every sign. Banks, automakers, insurance companies, and of course, overextended homeowners.
Paranoia strikes deep Into your life it will creep It starts when you’re always afraid
Is market psychology starting to change? The next stage after denial is fear. Has the severity of the recession changed people’s opinions?
The Psychology of the Bubble
Actually, from what I have observed, the market psychology is different at different stratas of the market. The low end is already approaching capitulation. There is no more hope for people holding on at the low end. The middle of the market is starting to feel fear. Prices are starting to significantly weaken, and those priced near the median are starting to show larger discounts. The high end of the market is still in denial.
The high end has the least reason to hope. Their denial is rooted in the continuing activity of knife catchers, but jumbo rates are rising, and the knife catchers are nearing exhaustion. The collapse in both pricing and market psychology is working its way up the food chain.
Today’s featured property is a low-end condo approaching its 2003 purchase price. I featured a similar property over a year ago. 93 Tarocco was asking $389,000, and it was being touted as an “investment property”. The investor must not be very happy right now…
Pearl Harbor Day was Sunday, December 7. One of the enduring images of “A date which will live in infamy” is the wreckage of the USS Arizona. One thousand one hundred and seventy-seven crewmen died aboard the USS Arizona that day. The sunken hull sits quietly submerged beneath the waves.
Americans were not prepared for World War II. Peacetime isolationism and lingering problems from the Great Depression left us ill prepared for the challenges our nation faced. We ultimately prevailed, and the peacetime that followed ushered in a new era of prosperity in the United States. We are only now getting a taste of the economic upheaval of the Great Depression, and as a society, we are equally unprepared for the consequences. We will survive, and hopefully we will begin a new era of prosperity. However, some of the images of The Great Housing Bubble will also endure (I hope).
Some historians have argued that the military made a critical error
having so many ships in port at Pearl Harbor. We did not anticipate the
attack, and we were not prepared for it. Like the USS Arizona, many homedebtors today are underwater. Their lack of preparation for this catastrophe has left them deeply in debt with little hope of recovery. For those who became dependent upon a lifestyle of mortgage equity withdrawal, this is the end of times. Many are hoping our new President will be a messiah. They cling to false hopes for a bailout that will allow them to go back to living the good life of Ponzi Scheme financing. That isn’t going to happen.
Today’s featured property is another HELOC abuser who lives on Arizona and is just as underwater as the ship.
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Pearl Harbor Day was Sunday, December 7. One of the enduring images of “
